Articles Tagged with buy-sell agreement

  • Buy-sell agreements, like a shotgun sale triggered by a deadlock, are the principal means by which the owners of closely held businesses protect against the worst consequences of deadlock.

  • Commonly used shotgun provisions allow one party to set the price and allow the other party to decided whether to buy or sell at the offered price.  Closely related to the shotgun is an auction that allows offerors a chance to sweeten their offers to buy.

  • The compelled sale of an equity interest triggered by a buy-sell agreement will be subject to the fiduciary duty of loyalty and the implied covenant of good faith and fair dealing.

  • Courts may apply shotgun or auction techniques when compelling the sale of a business as a going concern.


A well-drafted agreement between the owners of a business will address the issue of what to do in the event they become deadlocked.  This is true of effective shareholder agreements or corporate by-laws, limited liability company operating agreements or partnership agreements.

Agreements that are intended to prevent or resolve a deadlock in most circumstances will contain language that in some circumstances will require the exit of one person from the business.  This exit, in turn, requires payment of the value of the equity interest of the departing owner.

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In this post, the last in a series on deadlock in the closely held business, we look at buy-sell agreements as a means of breaking deadlocks without litigation and, in particular, a form of buy-sell often referred to as a shotgun.  A buy-sell often avoids or greatly simplifies litigation between the deadlock owners of a business, sure.  It also has the effect of avoiding deadlock in the first instance.


A Series Examining Deadlock Among the Owners of Closely Held Corporations, Limited Liability Companies and Partnerships


Shotgun provisions are a form of weapons control, like the mutually assured destruction that has – thankfully so far, at least – kept the world powers from global conflagration.  Owners of a closely held business have an emotional as well as a financial investment in a business and triggering a process in which they may be forced to sell will be seen as a very unwelcome choice.  In many cases, shotgun language in governing documents triggers compromise among the owners of a closely held business.

Buy-Sell Agreements Triggered by Deadlock

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  • Owners of a closely held business, be it a corporation, limited liability company or partnership, may enter into contracts that are triggered when the principals have become deadlocked.

  • Anti-deadlock provisions may provide for the appointment of an independent director,  for alternative dispute resolution, or for the compelled sale of an equity interest.

  • The owner of a business that invokes the terms of an anti-deadlock provision, particularly when the sale of interest is involved, is likely to be subject to duties of loyalty and care.


After a closely held business becomes deadlocked, it is extremely difficult to push the parties toward some mechanism that might either break the deadlock or preserve the current management system, or event let the parties separate themselves on mutually agreeable terms.


A Series Examining Deadlock Among the Owners of Closely Held Corporations, Limited Liability Companies and Partnerships


Human nature stands in the way.  The parties likely have financial and emotional positions that they are unwilling to compromise.  These may range from the ability to control some aspect of the operations of the business to the payment of dividends or bonuses.

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Lawyers and their clients try to address the potential for future deadlock with these contractual provisions that are known by a number of descriptions, such as buy-sell agreements, shotgun

provisions, put-call terms.  In the world of closely held limited liability companies, corporations and partnerships, a buy-sell agreement that is triggered by a deadlock is the pre-nuptial agreement of business divorce.

In this and the following post, we examine these contractual provisions that are used to break deadlocks.  We consider first the scope of anti-deadlock provisions, when they may be invoked and whether they are subject to judicial controls.  In a following post, we will look at buy-sell agreements in more detail and, in particular, shotgun language that is intended to keep a forced sale on terms acceptable to both parties. Continue reading

Attorney for Buy-Sell Agreement
A business divorce case came into the office a couple of years ago, one of the second-generation owners was looking to force one of the first generation owners — who never came to work anymore — into retiring and selling his interests.

We reviewed the shareholder ledger and the by-laws and the second generation had a clear majority of shares.  So at least the majority could terminate the employment of the minority if that was the way they wanted to go, and he would then have the ability to bring a suit to be bought out.  Or more likely, once he was fired, he would want to be bought out.  So far, so good.

But then the buy-sell agreement.  It provided a formula for valuation that was pegged to the equity accounts of the shareholders some 25 years earlier.  The books and records for that time period had long since disappeared.  In the end, we were able to piece together a guess about the equity accounts and to negotiate a package.

Buy Or Sell

Dispute Related to Repurchase of Shares Under Buy-Sell Agreement Subject to Agreement to Arbitrate

Agreements to arbitrate are frequently added to buy-sell agreements and other corporate governance contracts.  These agreements will be enforceable in nearly all circumstances and the parties should be certain that arbitration – rather than litigation in court – is what they really want.

In a recent appeal from a court order refusing to enforce an agreement to arbitrate after the parties had already been in litigation for two years, the Appellate Division of Superior Court rejected arguments that the arbitration clause was narrowly drawn.  Gatta v. Gatta, Docket No. A-3161-11T (App. Div. October 26, 2012).  Because the subject matter of the dispute was also the subject matter of the contract, the agreement to arbitrate was enforceable notwithstanding the delay in asserting the right.

Shareholder Seeks to Enforce Arbitration Right

The appeal was brought by Defendant Joseph Gatta from the trial court’s denial of an application to compel arbitration under a shareholders agreement.  Gatta and the company, Joseph Gatta & Sons, Inc., were sued by Gatta’s brother, Anthony Gatta, one of four shareholders in the business.  Anthony sued after he was fired and the company did not respond to his demands to purchase his interest.

 

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